Canada: What Is The Effect Of Piercing The Corporate Veil?

When the court pierces the corporate veil of a corporation, can another party be found to be the real party to the contract? Or is that other party only subject to consequential relief and not contractual relief? That is the issue which the English Court of Appeal recently faced in VTB Capital Plc v. Nutritek International Corp. That Court recently held that even in the face of fraud and other serious wrongdoing, the other party cannot be held to be a party to the contract unless the corporation which was shown as a party to the contract was a façade or sham.

The identity of the parties to a contract is fundamental to the contract's legal existence and its commercial viability. In the context of building contracts, that identity is even more important since the parties undertake inter-related performance obligations and are relying upon the creditworthiness of the other parties to make sure that the project is completed. So the decision in VTB Capital should be carefully analyzed by those concerned with building contracts.

The Factual Background

The claim arose from a loan by VTB Capital, a company incorporated in England which carried on business as a bank in London. VTB Capital was controlled by a Russian state bank. The loan was to a company (RAP) incorporated in Russia, and was for the purpose of RAP buying six dairy companies in Russia. Other related agreements were also made, including a share warrant deed and participation agreement. The loan was not repaid and VTB Capital commenced an action in the English courts and sought to serve the claim on the defendants outside England. VTB Capital originally alleged that it was induced to enter into the loan by two other Russian companies and a Russian individual (the "Russian third parties"). It then sought to amend its claim to "pierce the corporate veil" of RAP, and assert that RAP was really only a puppet of the Russian third parties and that they were the real parties to the contract. VTB then asked permission to serve its claim outside England, with that contractual allegation included in the claim.

The English Court of Appeal held that when a corporation is a party to a contract and the corporate veil of the corporation is sought to be pierced so as to make others liable, then apart from the case where the corporation is a façade or sham, those others are not liable as parties to the contract. The other parties are only liable for consequential relief or based upon separate tortious or other wrongdoing. Accordingly, the Court of Appeal held that the new contract claim against the three Russian companies was not a valid legal claim and refused to permit the claim with this contractual allegation to be served outside England.

Piercing The Corporate Veil

The Court of Appeal undertook a lengthy review of English case law concerning "piercing the corporate veil." It agreed that the corporate veil of a corporation can be pierced if there are "special circumstances....indicating that [the corporation] is a mere façade concealing the true facts." Yet, it held that a proper reading of English cases disclosed that the "fraudulent or dishonest use of a company by its corporators or controllers so as to conceal the latters' true identities" cannot in law possibly make those third party corporators or controllers the real and original parties to the contract. Rather, the corporation remained the party to the contract. If the corporators and controllers were to be held liable, that could occur through consequential remedies which would hold them accountable for monies or benefits received or for other equitable remedies, or they might be liable based upon separate tortious claims.

The Court of Appeal refused to apply the agency doctrine of undisclosed principals to this situation. The court said that the law on that subject was "anomalous". On the facts of the case, the court said that the doctrine could not apply because "the puppeteers [had not] authorized the puppets to enter into the contracts on their behalf", and because "VTB [did not intend] to contract with anyone other than the counterparties" named in the contracts.

The Court of Appeal accordingly found that the judicial authorities

"do not, however, go to the length of treating the puppet company as other than a legal person that is formally distinct and separate from the puppeteer; and were they to do otherwise, they would be ignoring the principles of Salomon. Consistently with that, they do not provide any basis for the proposition that the puppeteer should be regarded as having always been a party to a contract to which it or he plainly was not a party."

This decision will have to be read very carefully. A bald conclusion - that the fraudulent or dishonest use of a company whereby the real actors' identity is not disclosed cannot give rise to contractual liability for those actors -appears to raise serious legal questions, at least in Canada.

Moreover, this decision was given in the context of an application to serve the claim outside the jurisdiction and not upon the ultimate merits of the case. So the ambit or application of the decision may be somewhat in doubt. The following are some of the apparent limitations of the decision.

First, the Court of Appeal did not doubt that, if the corporation was a "façade or sham", then the corporate veil could be pierced. So, the VTB Capital decision involves a party to a contract which was a real party with a real corporate existence. What amounts to a "façade" or "sham" in any particular case may be a factual issue, but the present decision does not exclude the contractual liability of a third party if the corporate party fits within those words. However, if the "puppet" is a real and existing entity, then the puppet and not the puppeteer is liable.

Second, the Court of Appeal did not hold that, if the facts of a case fit the doctrine of undisclosed liability, then that doctrine cannot and should not be applied. All it held was that the present facts could not be "shoe-horned" (as it said) into that doctrine.

In essence, the Court of Appeal accepted the "façade or sham" basis for piercing the corporate veil but rejected the two other submissions for doing so.

First, it rejected the proposition that the court has a general power to pierce the corporate veil and that the court could hold the third party contractually liable "in the interests of justice."

Second, it rejected the proposition that the corporate veil could be pierced if "the company was involved in some impropriety". If the latter conduct existed, then the "relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts", and not the contractual liability of the wrongdoer.

There is little doubt that, the next time a plaintiff in the Anglo-Canadian context attempts to pierce the corporate veil, the decision in VTB Capital will be pulled off the shelf, or downloaded from bailii. It is a densely written decision which cited many English decisions. But it cited no cases from Canada where the "corporate veil" issue has been frequently addressed.

On policy grounds, the decision adheres strictly to traditional contract law limiting the effect and enforcement of a contract to the parties named in it. The English Court of Appeal made a policy decision not to allow fraudulent corporate activity to give rise to a contract remedy against third parties. It did so at a time when courts, at least in Canada, are giving broader effect to contracts and allowing them to be enforced by third parties, and when Canadian courts seem inclined to provide wide remedies against corporate fraud. The future impact of the VTB Capital will depend, at least in Canada, on whether the same policy choice is made in Canada as was made in England.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 1, Part 1(a)(i)(E)

VTB Capital Plc v. Nutritek International Corp., [2012] EWCA 808

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions